Consumer price inflation rose in June after three consecutive months of moderation due to a spike in vegetable prices halting a disinflationary trend underway in the economy, Reserve Bank of India (RBI) officials led by deputy governor Michael D. Patra wrote in the July edition of RBI Bulletin.
Headline inflation
Headline inflation measured by on year changes in the all-India consumer price index (CPI) edged up to 5.1% in June from 4.8% in May. The 28 basis points (bps) rise in inflation came from a positive momentum of 133 bps, which more than offset a favourable base effect of 106 bps, they wrote in the monthly State of the Economy article.
The on month rise in overall CPI was due to a positive momentum of 269 bps in food, 6 bps in fuel and 12 bps in the core group. “Food inflation (YoY) firmed up to 8.4% in June from 7.9% in May as the positive price momentum more than offset a favourable base effect,” the officials observed.
In terms of sub-groups, inflation edged up in cereals, milk and products, fruits, sugar and prepared meals, while meat and fish, eggs, pulses and spices registered a moderation, they stated.
Deflation in LPG
The RBI officials observed that core inflation remained unchanged at 3.1% in June, while vegetable prices continued to record double-digit rise YoY. Edible oils and fats recorded a lower rate of deflation. Fuel and light category deflation remained unchanged at -3.7% in June. While growth in kerosene and electricity prices moderated, deflation in LPG prices continued.
Significantly, they observed the belief that food price shocks are transitory is not borne out by the past year’s experience - too long a period for a shock to be called ‘transitory’. They said, superimposed on this ‘persistent’ component are sporadic spikes in a range of vegetables prices that overlap across constituents to give this category an enduring character.
Gains undermined
“Food prices are clearly dominating the behaviour of headline inflation... undermining the gains of lowering core and fuel inflation through a combination of monetary policy and supply management,” the officials stated.
“While households’ current perception of inflation has been moderating, this is not being reflected in their three months ahead and one year ahead expectations, which remain elevated,” they said.
“The accumulation of food price pressures threatens the outlook for inflation in the form of spill-overs to wages, rents and expectations,” they added.
